Check Engine!

Watching the blood drain out of the auto industry as GM and Chrysler negotiate for survival is one of the sad realities of this financial crisis—or is it?These two proud companies have seen this coming for a long time but continued to careen down the freeway building land yachts we did not want or small cars we would never buy.

The only thing that surprises me is that the Obama Administration would invite and even subsidize the entry of Fiat into the oversaturated US auto market as a pseudo-white knight for Chrysler. What gives with that?

Fear of bankruptcy has been the tool of choice to force the parties to the bargaining table and may have worked to get each side shareholders, bond holders, and unions to face up to the realities. But laws, sausage and shotgun mergers are never pretty to watch.

Shareholders are likely to get wiped out in any scenario and this long goodbye tragedy has given them ample opportunity to bail out in slow motion over the last few years. Bondholders bet, wrongly it seems now, that their preferred status and the fear of bankruptcy would keep them more whole than others around the table. This is a pure game of chicken on their part.  For the government, this is a distraction with no happy ending so it needs to offer tough love to the parties and wrap this up soon.

The UAW after bleeding the patients for years with wages and benefits unrelated to declining market share, auto sales prospects, and foreign competition, now finds the only way to save itself is to become the auto industry owners of record. The tentative deal with Chrysler gives UAW 55% of the company. But there is something satisfying about the penalty the UAW is paying that it must now take over the company and make the hard choices as owner that it was unwilling to make as labor.

Meanwhile Ford seems to have the ghost of Henry I whispering into its ear as it hunkers down, cuts cost, sells off under-performing brands and avoids the kiss of death from government bailouts—it just might work.

As for GM and Chrysler, my sense is we are seeing the endgame take shape with the best outcome looking something like this:

  1. Production Capacity Cut to Match Market Share. The total size of the Big 3 shrinks by cutting brands, closing dealerships, and reducing the work force and cost structure to match a market share that represents no more than about 10 million units per year—a little lower than the current US market.
  2. GM survives by half. By shrinking, GM has the best opportunity to survive leading with its Chevy and Cadillac car brands in North America and Buick in China and other Asian markets. Personally, I would not save GMC but rather offer trucks under the Chevy banner. By selling part of Opel to an EU partner and leveraging Buick to partner in Asia GM can still position itself as a global player but it will be a long slog. Bankruptcy as a pre-packaged deal is probably still necessary to finish the job of stripping the costs and baggage out of the company.
  3. Ciao Chrysler! The #3 auto maker is repositioned as the platform for Fiat’s re-entry into the US market leveraging the Jeep brand and Fiat’s small car platform in a few of Chrysler’s North American factories. Not a bad outcome if you can get the US government to write checks to make this problem go away. Everything else at Chrysler is killed off or sold for cash.

The rest of this story will be driven by a combination of technology change producing more fuel efficient vehicles with few emissions, a renewed focus on quality and design to restore customer confidence and the “fun factor” to the products surviving, and getting the government out of the business of running the business.

A streamlined GM and liosuctioned Ford back from the Biggest Loser fat farm have one last opportunity to be world class car companies, but ONLY if they do not waste this crisis by half measures which reduce the pain but fail to cure the patient of the disease of bloat.  They also have one last chance to squeeze the government for relief not in the form of capital but in competitive relief from CAFE standards and other constraints which prevent them from competing in a global market for vehicles.

So who is left standing?   The new “Big 6” of Toyota, Honda, VW, BMW, Ford, GM competing worldwide—some smaller scrappy players like Fiat, Nissan/Renault, and Hyundai to keep them honest.


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